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Lithium Frenzy Seen Ending in Tears as Bernstein Warns of Supply

Lithium demand might be booming, but it’s future supply that investors should be concerned about when it comes to one of the mining industry’s hottest products.

The metal -- used in batteries -- has been a rare bright spot for the mining industry as prices almost tripled in the year to June amid a supply shortage and rising demand for electric vehicles. That’s prompting producers to spend more on technology to boost supply, something that will improve significantly as the market grows, Sanford C. Bernstein Ltd. said.

“Lithium demonstrates all the characteristics of a commodity bubble,” Paul Gait, an analyst a Bernstein in London, said in a report on Monday. “The lithium frenzy should all end in tears.”

By 2040, about a third of all light vehicles sold will be electric, equivalent to 41 million cars and about 90 times the amount last year, according to Bloomberg New Energy Finance. Consultant CRU Group said in a June report that battery-grade lithium prices in China jumped to more than $20,000 a metric ton from about $7,000 in mid-2015.

But lithium isn’t rare and is one of the world’s most underutilized commodities, Gait said. Global mine capacity is expected to climb by about 70% on the back of new projects and expansions in the decade to 2025, according to Bernstein.

Lithium Demand Spurs Production Innovation

“The bull case for lithium relies entirely on the demand side, as no other commodity shows such strong demand prospects,” Gait said. “However, as the lithium price has soared since 2015, and as the commodity has become fashionable, a number of companies are now proposing alternative methods of production.”

Supply is currently dominated by four producers -- Rockwood Holdings Inc., Soc. Quimica & Minera de Chile SA, Albermarle Corp. and FMC Corp. -- who control as much as 90% of the market. There are other firms looking to build new projects, and Deutsche Bank AG and Macquarie Group Ltd. have both forecast that the market will move into a larger surplus at the start of the next decade.

“While the supply base of lithium is already significant, we believe it can expand further with a number of technological breakthroughs being developed,” Gait said. “The industry needed just over a year of elevated price to start allocating capital to find more cost-effective ways to extract lithium.”